This quarterly report on Form 10-Q includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, which we refer to in this quarterly report as the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, which we refer to in this quarterly report as the Exchange Act. Forward-looking statements are not statements of historical fact but rather reflect our current expectations, estimates and predictions about future results and events. These statements may use words such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “predict,” “project” and similar expressions as they relate to us or our management. When we make forward-looking statements, we are basing them on our management’s beliefs and assumptions, using information currently available to us. These forward-looking statements are subject to risks, uncertainties and assumptions, including but not limited to, risks, uncertainties and assumptions discussed in this quarterly report. Factors that can cause or contribute to these differences include those described under the headings “Risk Factors” and “Management Discussion and Analysis and Plan of Operation.”
If one or more of these or other risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, actual results may vary materially from what we projected. Any forward-looking statement you read in this quarterly report reflects our current views with respect to future events and is subject to these and other risks, uncertainties and assumptions relating to our operations, results of operations, growth strategy and liquidity. All subsequent written and oral forward-looking statements attributable to us or individuals acting on our behalf are expressly qualified in their entirety by this paragraph. You are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date of this quarterly report. The Company expressly disclaims any obligation to release publicly any updates or revisions to these forward-looking statements to reflect any change in its views or expectations. The Company can give no assurances that such forward-looking statements will prove to be correct.
The 4LESS Group Inc. (“FLES”, the “Company”, “we” or “us”), the Company described herein, was incorporated under the laws of the State of Nevada on December 5, 2007, with offices located at 4850 N Rancho Dr # 130, Las Vegas NV 89130. It can be reached by phone at (662) 510-5866.
On November 29, 2018, the Company entered into a transaction (the “Share Exchange”), pursuant to which the Company acquired 100% of the issued and outstanding equity securities of The 4LESS Corp. (“4LESS”), in exchange for the issuance of (i) nineteen thousand (19,000) shares of Series B Preferred Stock, (ii) six thousand seven hundred fifty (6,750) shares of Series C Preferred Stock, and (iii) 870 shares of Series D Preferred Stock. The Series C Preferred Shares have a right to convert into common stock of the Company by multiplying the number of issued and outstanding shares of common stock by 2.63 on the conversion date. The Share Exchange closed on November 29, 2018. As a result of the Share Exchange, the former shareholders of 4LESS became the controlling shareholders of the Company. The Share Exchange was accounted for as a reverse takeover/recapitalization effected by a share exchange, wherein 4LESS is considered the acquirer for accounting and financial reporting purposes. The capital, share price, and earnings per share amount in these consolidated financial statements for the period prior to the reverse merger were restated to reflect the recapitalization in accordance with the shares issued as a result of the reverse merger except otherwise noted. The prior period results up until the transaction date would include the results of operations of only 4LESS.
4LESS was formed as Vegas Suspension & Offroad, LLC on October 24, 2013 as a Nevada limited liability company and converted to a Nevada corporation with the same name on May 8, 2017. On April 2, 2018, the Company changed its name to The 4LESS Corp. The Corporation had S Corporation status. The Corporation operates as an e-commerce auto and truck parts sales company. As a result of the share exchange, the Company is now a holding company operating through 4LESS and offers products including exhaust systems, suspension systems, wheels, tires, stereo systems, truck bed covers, and shocks.
In 2018 The 4Less Corp (“4Less”) invested heavily in technologies to support our current and future growth initiatives. These technologies included customer relations management software (CRM) linking all marketplaces together seamlessly and inventory API data feeds linking hundreds of thousands of auto parts inventory levels for availability to be sold. Opening our first warehouse/distribution center here in Las Vegas with our proprietary warehouse software in April of 2018 has further positioned 4Less to capitalize on the multi-billion dollar aftermarket auto parts sector. Additionally, we launched a small manufacturing partnership program which will allow small manufactures to utilize the company’s platform to push their products in front of millions of potential buyers across the globe.
4Less management believes that the 4Less proprietary web sites, which includes order customization, live chat, install videos, directions and installation services, offer the best buying experience for consumers interested in purchasing aftermarket auto parts on the internet today.
As a result of these many upgrades, the complexity of many of our products and the ability to drive more traffic to our proprietary websites where margins are greater, we felt it was in the best interest of the company to terminate its relationship with Amazon. We expect all of these decisions to help The 4Less Corp achieve growth goals for 2020.
Results of Operations for the Three Months Ended October 31, 2019 Compared to the Three Months Ended October 31, 2018
We had revenue of $1,890,461 for the three months ended October 31, 2019, compared to $2,046,256 for the three months ended October 31, 2018. We had total cost of revenues of $1,542,836 for the three months ended October 31, 2019, compared to cost of revenues of $1,537,140 for the three months ended October 31, 2018. For the three months ended October 31, 2019 and 2018 gross profit was $347,625 and $509,116, respectively. Sales decreased by $155,795 due to discontinued sales on Amazon.com which were partially offset by lower e-commerce service, commissions and fees costs explained below. Cost of revenues increased due to a change in product mix and fewer drop shipments to customers which increased our shipping cost to our warehouse.
We had total operating expenses of $817,113 for the three months ended October 31, 2019, consisting of $7,033 of depreciation, $110,385 postage, shipping and freight, $23,827 of marketing and advertising, $163,022 of e-commerce expenses, commissions and fees, $30,360 of operating lease cost, $251,923 of personnel costs and $230,583 of general and administrative expenses. For the three months ended October 31, 2018, we had total operating expenses of $787,934, consisting of $11,422 of depreciation, $86,018 postage, shipping and freight, $68,145 of marketing and advertising expenses, $224,521 of e-commerce expenses, commissions, and fees, $26,701 of operating lease cost, $319,603 of personnel costs and $51,524 of general and administrative expenses. Operating expenses for the three months ended October 31, 2019 were generally higher because they were the combined operations of the 4 Less Group Inc. whereas the prior period consisted only of the results of The 4 Less Corp. In comparing the three months ended October 31, 2019 and October 31, 2018: postage, shipping and freight increased by $24,367 due to fewer drop shipments in 2019 thus higher shipping costs, due to an expanding product line there were new items that needed to be warehoused and shipped. Marketing and advertising decreased by $44,318 because in 2019 Company reduced expenses to improve cash-flow. The decrease in e-commerce expenses, commissions, and fees of $61,508 which represents the fees paid on the discontinued Amazon sales mentioned above. Personnel costs decreased by $67,680 because the Company reduced expenses this quarter to improve cash -flow. General and admin increased due to the inclusion of the 4 Less Group Inc. in 2019 as mentioned above as well as a new warehouse added in October 2018 and health insurance added in 2019.
We had total other income (expense) of $(525,472) for the three months ended October 31, 2019, consisting of interest expense of $(121,601), loss on derivatives of $(196,303), and amortization of debt discount of $(212,004).There was also a gain on sale of property and equipment of $4,436. We had total other income (expense) of $(5,686) for three months ended October 31, 2018, consisting only of interest expense. Again the results of the three months ended October 31, 2019 were generally higher because they were the combined operations of The 4 Less Group Inc. which contained the interest, discount and derivatives derived from the convertible debt whereas the prior period consisted of the results of The 4 Less Corp. only which had none.
We had a net loss of $994,960 for the three months ended October 31, 2019, compared to a net loss of $284,504 for the three months ended October 31, 2018 explained in the reasons given above.
Results of Operations for the Nine Months Ended October 31, 2019 Compared to the Nine Months Ended October 31, 2018
We had revenue of $6,218,836 for the nine months ended October 31, 2019, compared to $6,448,098 for the nine months ended October 31, 2018. We had total cost of revenues of $4,692,915 for the nine months ended October 31, 2019, compared to cost of revenues of $4,719,360 for the nine months ended October 31, 2018. For the nine months ended October 31, 2019 and 2018 gross profit was $1,525,471 and $1,768,738, respectively. Sales decreased due to discontinuing sales on certain websites because of higher commission expenses. Cost of revenues and gross profit decreased as sales decreased, however, the Company’s overall profitability remained steady after taking into consideration the lower e-commerce expenses, commissions, and fees explained below.
We had total operating expenses of $2,777,010 for the nine months ended October 31, 2019, consisting of $26,021 of depreciation, $342,370 postage, shipping and freight, $145,206 of marketing and advertising, $551,943 of e-commerce expenses, commissions and fees, $83,762 of operating lease cost, $902,592 of personnel costs and $725,116 of general and administrative expenses. For the nine months ended October 31, 2018, we had total operating expenses of $2,270,402, consisting of $26,159 of depreciation, $297,309 postage, shipping and freight, $150,042 of marketing and advertising expenses, $724,862 of e-commerce expenses commissions and fees, $48,102 of operating lease cost, $816,369 of personnel costs and $207,899 of general and administrative expenses.
- 21 -
Operating expenses for the nine months ended October 31, 2019 were generally higher because they were the combined operations of the 4 Less Group Inc. whereas the prior period consisted of the results of The 4 Less Corp. only. In comparing the nine months ended October 31, 2019 and October 31, 2018 : postage, shipping and freight increased by $45,061 due to fewer drop shipments in 2019 thus higher shipping costs , due to an expanding product line there were new items that needed to be warehoused and shipped, e-commerce expenses, commissions, and fees decreased by $172,919 which represents the fees paid on the discontinued Amazon sales mentioned above. Personnel costs increased by $86,223 as we invested heavily to make sure we had great customer service and support, both in the office and with customers, as we grow our business. General and admin increased due to the inclusion of the 4 Less Group Inc. in 2019 as mentioned above as well as a new warehouse added in October 2018 and health insurance added in 2019.
We had total other income (expense) of $(1,302,971) for the nine months ended October 31, 2019, consisting of interest expense of $(804,902), loss on derivatives of $(107,953), gain on settlement of debt of $67,623, gain on sale of property and equipment of $4,436 and amortization of debt discount of $(462,175). We had total other income (expense) of $(20,503) for nine months ended October 31, 2018, consisting of interest expense of $(7,181) and loss on sale of property and equipment of $(13,322). Again the results of the nine months ended October 31, 2019 were generally higher because they were the combined operations of The 4 Less Group Inc. which contained the interest, discount and derivatives derived from the convertible debt whereas the prior period consisted of the results of The 4 Less Corp. only which had none.
We had a net loss of $2,554,510 for the nine months ended October 31, 2019, compared to a net loss of $522,507 for the nine months ended October 31, 2018 explained in the reasons given above.
Liquidity and Capital Resources
Management believes that we will continue to incur losses for the immediate future. Therefore, we will need additional equity or debt financing until we can achieve profitability and positive cash flows from operating activities, if ever. These conditions raise substantial doubt about our ability to continue as a going concern. Our unaudited consolidated financial statements do not include and adjustments relating to the recovery of assets or the classification of liabilities that may be necessary should we be unable to continue as a going concern. For the three months ended October 31, 2019, we have generated revenue and are trying to achieve positive cash flows from operations.
As of October 31, 2019, we had a cash balance of $128,028, inventory of $350,108 and $6,893,711 in current liabilities. Given our poor working capital position, we will need to consider additional funding sources going forward. We are taking proactive measures to reduce operating expenses and drive growth in revenue.
The successful outcome of future activities cannot be determined at this time and there is no assurance that, if achieved, we will have sufficient funds to execute our intended business plan or generate positive operating results.
Capital Resources
The following table summarizes total current assets, liabilities and working capital (deficit) for the periods indicated:
|
|
|
|
|
|
|
|
|
|
October 31 2019
|
|
January 31, 2019
|
|
Current assets
|
|
$
|
525,807
|
|
$
|
453,942
|
|
Current liabilities
|
|
|
6,893,711
|
|
|
5,850,518
|
|
Working capital (deficits)
|
|
$
|
(6,367,904
|
)
|
$
|
(5,396,576
|
)
|
Net cash used in operations for the nine months ended October 31, 2019 was $856,121 as compared to net cash used in operations of $513,966 for the nine months ended October 31, 2018. The biggest changes in cash flows from operating activities were the cash changes in derivative and discount which were not applicable to the previous period. Net cash provided from investing activities was $133,087 for the nine months ended October 31, 2019 compared to cash used by investing activities of $104,854 for the nine months ended October 31, 2018. In the nine months ended October 31, 2019 assets were sold where in the nine months ended October 31, 2018 assets were acquired. Net cash provided by financing activities for the nine months ended October 31, 2019 was $791,661 as compared to $656,888 for the same period in 2018. This increase mainly comes from the convertible debt proceeds in 2019 that did not exist in the prior year.